Crowds of people cheered the HMS Prince of Wales aircraft carrier as it sailed out of Portsmouth harbour last week, on its way to join the cream of the Royal Navy for a round trip to Japan later this spring.

Only a few months ago rumours were swirling in Westminster that the carrier and its sister ship, HMS Queen Elizabeth, could be mothballed or scrapped as the chancellor, Rachel Reeves, tightened her grip on public spending before next month’s spring statement.

Then Donald Trump intervened, telling European leaders they needed to step up military support for Ukraine in preparation for a peace deal with Russia. In response, Keir Starmer said UK defence spending would rise to 2.5% of national income by 2027 – three years earlier than planned, with an ambition to reach 3% – with overseas aid taking the hit.

But with a domestic defence industry that has a reputation for blown budgets and lengthy delays – including during the Ukraine conflict – can Starmer rely on UK players to step up to support Europe’s defence against an expansionist Russia?

Investors eye gains

All branches of the armed forces can expect to avoid the spending cuts many feared would be implemented over the rest of the parliament. Britain’s manufacturing industry also breathed a sigh of relief – a long term commitment to defence spending is seen as an essential building block for sustained investment.

On Monday, shares in UK and European defence companies rallied as investors anticipated significantly higher spending by government feeding through to company profits.

For now, HMS Prince of Wales and HMS Queen Elizabeth are saved, despite the enormous cost of equipping and running them. Mechanical failures, the latest of which has kept the Queen Elizabeth in dock when it was supposed to be the main strike carrier heading to east, are already proving a headache.

There is no doubt, say experts, that the near £7bn construction cost of both ships will also be dwarfed over an expected 50-year lifespan by the maintenance costs, eating into a defence budget that has shrunk in real terms over the past three decades to £57bn this year compared with overall government spending of almost £1.3tn.

The pair were built by the defence contractor Babcock at its shipyard in Rosyth, Scotland with BAE Systems and the French company Thales.

Babcock is building Type 31 frigates on the same site while looking after the navy’s submarines at the Faslane base west of Glasgow.

The company employs about 75% of its 25,000 staff in defence-related jobs and says it is ready to be a beneficiary of any increase in the outlay for military equipment. The government is “creating an important opportunity for investment in the UK”, a spokesperson for Babcock said.

Apart from yards in Scotland and the Royal Navy’s main maintenance yard at Devonport, Plymouth, the company has 100 sites across the UK.

A chequered reputation

Make UK, the manufacturers lobby group, said there are about 12,000 companies in the UK defence industry, though many are only on the periphery, making paint finishes or widgets that end up in military vehicles.

At the core are a group of companies that collaborate to make the latest kit through a series of ongoing partnerships.

A clutch of larger companies appear well placed to benefit from Starmer’s defence push, including BAE, Rolls-Royce, Babcock, Italy’s Leonardo and France’s Thales. Last month the Ministry of Defence (MoD) unveiled the first British-made Boxer armoured fighting vehicle at the International Armoured Vehicle Conference in Farnborough. Due to number more than 600, the Boxer is a joint venture between Rheinmetall BAE Systems Land in Telford and the Franco-German KNDS in Stockport.

The Ajax “mini tank” is another foundation stone of the army’s investment along with the Challenger 2 tank. Ajax is being built by the US company General Dynamics at its factory in Merthyr Tydfil. The first units were finally delivered after an eight-year delay, £5bn in costs and concerns over the “litany of failures” connected to the programme.

In the air, BAE is working with Rolls-Royce and Leonardo on the new fighter jet Tempest, which the air force hopes will replace the Eurofighter Typhoon. Tempest’s manufacture, which will be decided by the current buyers, UK, Italy, Japan and Sweden, is many years away. In the meantime, MPs want the production of the Typhoon to be ramped up.

In maritime, the industry will gain from the Aukus nuclear-powered submarine programme – although Trump did momentarily fail to recognise the acronym for the Australia-UK-US security alliance.

Trevor Taylor, a defence expert at the Royal United Services Institute (Rusi) thinktank, says Britain’s defence industries need more funding to achieve the government’s aims.

“British industry is well placed to benefit,” he says, but the extra £6bn of funding being made available will only “lubricate the affordability challenges of the things already on order”.

Francis Tusa, the editor of Defence Analysis, says: “Defence spending was focused on a few big, expensive pieces of kit, such as the carriers, rather than meeting the needs of a prolonged land-based conflict, such as tanks, drones and rebuilding troop numbers.”

Healey’s US conundrum

With doubts lingering over the UK industry’s capabilities, domestic companies could lose out if Britain is forced to buy off-the-shelf weapons from US companies instead. Taylor says there is a way for the defence secretary, John Healey, to avoid buying US-made kit.

“When the government is looking at the purchase of a UK defence product it is tempting to ask whether it is as good as a model from the US, and if not, to buy from the US manufacturer.

“But we only need to ask whether the British or European kit deters the Russians, and if it does, which I have every confidence it would, then to say the UK version is good enough to buy.”

Seamus Nevin, Make UK’s defence specialist, says armed forces pensions would eat up a much of the spending, as would expected pay rises and attempts to increase the numbers of military personnel, which has decreased by almost 16% to 132,360 as of 1 April 2024 from 156,970 in 2014.

A Rusi report last year identified a large funding gap in the current financial year, and in 2025-26, on day-to-day spending.

In December 2023, the National Audit Office highlighted a deficit in the equipment plan of £3bn for 2024/25 and a further deficit of £3.9bn in 2025/26.

The extra £6bn should fill these gaps and keep current spending on track. Ramping up production has many hurdles to overcome.

“One of the issues facing defence contractors is a skills shortage that affects the whole manufacturing sector,” Nevin says. “There has been a 40% drop in apprenticeship starts since Theresa May’s complicated and much-derided apprenticeship levy scheme came into effect in 2017.”

Another barrier is a lack of financial backing that afflicts manufacturing in the UK more generally.

Nevin says more small and medium-sized firms should benefit from the extra funds for defence, but banks are reluctant to lend. “SMEs are often cash-dependent and need support to invest and grow,” he says.

One of Healey’s roles will be to prevent capital procurement budgets from overrunning and the extra money being wasted. The MoD was approached for comment.

A succession of parliamentary reports have called for an overhaul, citing the cost overruns managed by the agency Defence Equipment and Support, the arm’s length body that has overseen the majority of defence equipment and service purchases for the UK’s armed forces since 2007.

Concerns over the cost of constructing HMS Prince of Wales and HMS Queen Elizabeth were highlighted in a defence committee report in 2023. A strike by tugboat crews even forced the Royal Navy to scramble to get HMS Prince of Wales out of Portsmouth early. Starmer will hope the industry can sail more calmly in the years ahead.